As the title of this article suggests, the IRS is beginning to take a closer look at small business filings. According to Faris Fink, head of the Small Business/Self-Employed division of the IRS, the agency will be shifting its auditing focus from corporations to small-business partnerships due to their significant growth within the past six years. Small businesses have increased by over 15% with the largest coming from pass-through entities. Certified Public Accountant Michael Eisenburg states that the reason for the increase in these entities is due to a lesser initial upfront expense than corporations and less payroll responsibilities such as payroll taxes, annual fees, and managing W-2 forms for employees. Eisenburg also states that the IRS is paying more attention to small business owners because they have a greater possibility of writing off personal expenses as deductible business expenses. To evade trouble with the IRS, Eisenburg gives three tips to small business owners:
1. Keep business and personal accounts separate. Small business entrepreneurs want to make sure that everything is running through separate checking accounts. Using a single bank account will increase the likelihood that the IRS will conduct a second audit to examine your personal tax returns. According to Eisenburg, "It's automatically a free ride to looking at your personal return”.
2. Clearly track income and expenses. It is easy to keep track of your income and expenses once you have separate bank accounts for your business. Keeping paperwork is imperative to show auditors what you write checks for, why income is received, records of what was billed, and records to back up your expenses.
3. Don't deal in cash. Doing business transactions in cash raises a lot of questions in the eyes of the IRS. These transactions should be avoided because they are hard to trace and lead the IRS to wonder if you deposited all of your income or if you are paying your bills.
Paraphrased from http://www.entrepreneur.com/article/229921